Agricultural Commodities: The Next Bull Market

The next bull market will be in Agricultural Commodities.

It’s not difficult to see why. You only make big money by buying investments that have been ignored for years. And few investment classes are as unpopular as agricultural commodities (when was the last time someone you knew opened a sugar plantation or soy bean farm?)

It’s not mere anecdotal evidence either. Inventories for corn, wheat, and soybean are all near 40-year lows. Other soft commodities like cotton, sugar and coffee are at historically low inventories too. So there’s very limited supply.

And it’s only going to go lower.

The credit crisis has made it a lot more difficult for farmers to get access to credit for fertilizer. And low commodity prices have made it no longer economical to grow certain crops (I personally know of a large farm that will not be planting any corn this year for the first time in 60 years).

Yet, while supplies are dwindling, demand is growing rapidly. From 1974-2005, the world’s population grew by more than 1.1 billion people. Initially, most of them - and the rest of the world for that matter - weren't eating anything resembling a western diet. For example, in 1980, the average Chinese consumer lived off $1 a day.

However, as emerging markets’ economies began to expand, so did the diets of their citizens. In 1985 the average Chinese consumer ate 44 pounds of meat per year. Today, it’s more than doubled to 110 pounds.

Now, it takes 17 pounds of grain to generate one pound of beef. So grain demand is soaring... but land is limited. Worldwide arable land per person has fallen from 0.42 hectares per person in 1961 to 0.23 hectares per person in 2002.

It’s the perfect set up for any investment: dwindling supplies and growing demand. The inflationary holocaust will only be adding gasoline to the fire, pushing agricultural commodities to record highs. As Jim Rogers, the famed commodities investor, puts it,

God knows how high the price of agriculture is going to go, so that's where I'm putting more of my money now than in other things… I think I'm going to make more money in agriculture than I make in precious metals.'

You can alongside Jim with the ELEMENTS Rogers International Commodity Agriculture ETN (RJA).

RJA tracks the movements of the agriculture portion of Jim Rogers’ commodity index. As such, it gives broad exposure to a large basket of agricultural commodities including soybeans, oats, sugar, orange juice, coffee, cattle, etc (see the chart below).

click to enlarge

Now, as I’m sure you’re aware, commodities experienced something of a mini-bubble in mid-2008. The primary culprit was oil, which rocketed to $150 from $70 in the span of a single year. However, oil’s rise also brought up food prices (since the cost of shipping went up), which in turn pulled up agricultural commodities.

When the energy bubble popped in July ’08, oil lost over 50% of its value in a matter of months. Hundreds of large institutional investors (hedge funds, pension funds, etc) got caught on the wrong side of the trade and were forced to sell positions to cover their losses and meet redemptions. As a result, commodities got slammed across the board. Agricultural commodities were no exception.

However, what you may not know is that starting in early 2009, agricultural commodities began a strong bounce thanks to droughts (lower supply) and inflationary fears. Since the beginning of 2009, sugar is up 30%, soybeans recently hit a seven-month high, coffee is rallied 6% in the first week of May, etc.

In fact, agricultural commodities have been outperforming stocks since the beginning of 2009 (see the chart below).

With RJA you get exposure to all of these developments and more. It’s literally a basket of agricultural commodities hand-picked by Jim Rogers himself. It’s also the most diverse agricultural commodities index fund on the market. Take a look at RJA’s portfolio compared to its peers:

Investment Vehicle	Symbol	# of Commodities in Portfolio
Rogers Agriculture	RJA	20
Powershares DB Agri	DBA	4
iPath Dow Jones Agri	JJA	7

It’s important to note that RJA is not an exchange-traded fund (ETF); it’s an exchange-traded note (ETN). The primary difference is that instead of owning stocks, ETNs own unsecured notes - debt by a bank. In this sense, RJA doesn’t own actual bushels of corn or wheat. Instead it owns paper linked to those assets.

The only risk with ETNs occurs if the bank issuing the underlying notes goes under. However, the likelihood of this is virtually non-existent for RJA: the bank backing its notes is the Swedish Export Credit Corporation: an entity 100% owned by the Swedish government.

In order for this bank to collapse, the Swedish government itself would have to default. The bank’s credit ratings are AA+, one step below AAA, the highest rating possible. The risk here is minute… however, when it comes to investing you should always consider every risk, no matter how remote.

With RJA, we’ve got broad exposure to the sector Jim Rogers is most bullish on (where he’s putting most of his money now). Even better, the fundamentals are lining up in our favor: dwindling supplies and increased demand. The Fed’s money printing and the coming inflationary holocaust will only add fuel to the fire.

Comments

[A. Nony Mouse:]

But wait, with an Exchange Traded Note, aren't you basically betting on the future solvency of the issuer and not the commodities themselves?

May 21 08:50 AM

[johnmorrison9:]

Yes the note if different than the fund.

May 21 10:57 AM

[Globel E:]

My word !! You clearly have legitimate understandings of both the population/food-prefer... AND the stock market. That's down right unnerving. These two realms of understanding seem to be so disparate that experts in the one have little concept of the basics in the other. Thank you. (Really!)
(Prof. Emeritus-Land grant ag. univ.- and comfortable survivor of recent stock market mayhem.)

May 21 11:29 AM

[Donald Johnson:]

How much credibility should we give to Jim Rogers? He's a promoter of commodity mutual funds and ETNs and profits when investors put their money into his funds, I think.

The problem with speculating in commodities is that individuals are at much more of an info disadvantage than individual stock speculators are. The commercials and pros in those mkts. have much more info, which they obtain from expensive commodity wire services and their own activities in the trade.

It's easier to follow a few markts, such as grains or metals, than all of the markets represented in the funds. So a lot of traders use technical indicators and "black boxes" that work for some and not for others.

What scares me about the futures markets are the wide daily limits. The price of corn or beans used to have daily limits of 10 cents. Now the limits are up to 50 cents, or $1 daily range. That can add up if you have five or ten contracts for 5,000 bushels each and are trading on 15% to 20% margins, which, I think, most people do.

This is why even though I know the ag and metals futures markets very well, I don't trade them.

May 22 08:01 PM

[Donald Johnson:]

Also, I think the writer ignores the impact of price on supply and demand. If supply is constrained, as he says, price will constrain demand until some kind of equilibrium develops. Econ 101.

Historically, ag markets adjust relatively quickly because both producers and consumers react to prices by finding substitutes for high-priced foods and moving into the cheap ones. With the world in a deep recession, you're already seeing reduced demand. How much more of a drop in demand can we expect.

In commodities, prices can be quite volatile for awhile and then remained depressed for a long time despite government subsidies such as price supports and scams such as we're seeing in ethnol.

May 22 08:12 PM

[Donald Johnson:]

Ethanol.

May 22 08:13 PM

[mark joseph:]

my question is the same as the above. If it is a note and the borrower pays it's bills all we really have is a good , fixed income bond fund? This would not seem to me to be a way to benefit from the increased price of the commodity.

I well may be missing something here, please enlighten.

Jun 05 01:17 AM